[A-List] Kazakhstan: government vs. oil companies?

["Michael Keaney" <michael.keaney@xxxxxx>]

Bitter feelings over failed $3bn Kazakh oil deal
By Michael Lelyveld
Asia Times, November 23 2002

One week after the suspension of Kazakhstan's biggest oil project,
explanations of the government's dispute with foreign oil companies are
starting to come out.

Speaking on November 19 at a press conference in Astana, Kazakh Energy
Minister Vladimir Shkolnik said that last week's halt to the US$3 billion
expansion of the giant Tengiz oil project followed a rift over financing the
cost for the next three years.

The sudden shelving of the second phase of the nine-year-old Tengizchevroil
venture shocked the industry and could damage Kazakhstan's economy, which
relies on the US-backed project. Foreign investment at the oil field in
western Kazakhstan has been the oldest and largest in the region since
Soviet times. Although production is expected to continue at current levels,
Western oil companies have warned that thousands of jobs will be lost
without the expansion.

But Shkolnik took a tough line this week in dealing with the Tengiz
consortium, led by an affiliate of US-based ChevronTexaco. The minister
said, "If all partners do not reach an agreement on how to finance this
project ... it means the project will not expand," the Reuters news agency
reported.

As a partner through its state-owned KazMunaiGaz petroleum company,
Kazakhstan voted against the project during a production meeting at the end
of last month. Because the venture's budget required a unanimous vote, the
move blocked the development, which was expected to boost output by nearly
75 percent to 440,000 barrels per day.

Shkolnik's explanation focused on technical accounting, which the government
argued would cut tax payments to the nation's budget by $1 billion over five
years, Interfax has reported. In a statement, the government said that
Tengizchevroil had shifted its accounting for expenses, using a technique
known as "accelerated depreciation", to write off the costs quickly.

But Reuters has reported the disagreement differently, saying that Shkolnik
opposed the venture's plan to reinvest revenues in the project instead of
taking profits and paying more taxes. The government wants to finance the
expansion with loans instead, keeping tax payments high.

Yet a third and more detailed explanation came this week from the Russian
Energy newsletter, published by Russia's Prime-Online news agency. The
weekly cited sources at KazMunaiGaz as saying that the company wanted its 20
percent share of the costs to be paid by ChevronTexaco.

The Kazakh company reportedly argued that ChevronTexaco owed the country
$210 million, plus interest out of a $1 billion signing bonus for the
original Tengiz contract. The US company contested the figures and refused
to pay the KazMunaiGaz share of the project costs, the newsletter said. It
was backed by other consortium members, effectively killing the plan. Other
members include US-based ExxonMobil Corporation and LUKArco, a Russian-US
joint venture.

This account is consistent with a report last week by the web site
eurasianet.org that some Kazakh officials had also suggested tapping the
country's $1.6 billion national fund to finance KazMunaiGaz operations. The
government has previously insisted that the purpose of the fund is to
support the country's economic stability.

A ChevronTexaco official, speaking to Radio Free Europe/Radio Liberty on
condition of anonymity, said last week that the proposal would be tantamount
to paying KazMunaiGaz with money from Western oil companies, since their
taxes and royalties were the sole source of the national fund.

Analysts have been quick to blame the standoff at Tengiz on a deteriorating
investment climate and a two-year struggle over a new draft investment law.
The legislation could limit the rights of foreign companies to appeal
government decisions affecting signed contracts. President Nursultan
Nazarbaev has said the government has held dozens of meetings with foreign
oil companies to renegotiate tax breaks granted years ago.

The oil companies have complained that they are being squeezed by the
government and its powerful monopoly KazMunaiGaz, which includes Nazarbaev
family interests. But on November 19, Shkolnik denied that the Tengiz
funding issue was part of a trend and attacked those who had made the
connection.

"The decision to suspend the project and the investment climate in
Kazakhstan are not at all connected. Those who link these two things are
doing this deliberately in an attempt to spoil the investment climate in
Kazakhstan," Shkolnik said.

At the same time, Kazakh Finance Minister Zeinulla Kakimzhanov told
reporters that foreign oil companies had paid $325 million less in taxes
than expected this year. He suggested that some were withholding payments to
pressure the government, Interfax reported.

While the investment environment has grown increasingly cloudy for foreign
oil companies in the past two years, it now appears that it may turn openly
hostile unless a compromise is reached soon. According to reports in the
past week, members of the consortium for Kazakhstan's giant Kashagan oil
field in the Caspian Sea are also considering a delay because of similar
conflicts.

In a further sign of trouble, investors in the $2.5 billion pipeline from
Tengiz to Russia's Black Sea port of Novorossiisk have been hit with a
series of higher costs. In Moscow, the general director of the Caspian
Pipeline Consortium, Ian McDonald, cited "alarming tendencies" including
port charges, Russian tax demands, and attempts to raise tariffs, all of
which were supposed to be barred by legal agreements.

Copyright (c) 2002, RFE/RL Inc. Reprinted with the permission of Radio Free
Europe/Radio Liberty, 1201 Connecticut Ave NW, Washington DC 20036